5 Generals for Your Portfolio?

This is the last in a series of commentaries that will look at five companies whose names begin with the word "General." We recognize some of them as household names and as global conglomerates with operations (just like our military) throughout the world. In earlier commentaries, I reviewed General Electric Company; General Dynamics Corporation; General Mills, and General Motors Company. This commentary is a review of General Communication (Nasdaq: GNCMA  ) .

These corporate leaders have few similarities other than company names that start with the same word -- "General." The name is synonymous with leadership; historically we have had both great and mediocre generals leading the fight, and so it is with these five companies.

Earnings quality is reflected in the financial statements
The Motley Fool offers two databases -- EQ Scan and EQ Score -- that are used to uncover cash flow and revenue recognition issues. As I explained earlier, smart financial officers can use several techniques to manipulate financial results, and manipulation of any of the three financial statements usually affects the other two. GAAP rules are complex and require the interpretation of experts (i.e., CPAs). But a critical eye on these statements can often uncover mistakes or trends that could be important for investors to understand before the battle has been lost.

When I review a company for earning quality, I assign an index rank to the company from 1 (the lowest quality ranking) to 5 (the highest quality) and an associated numerical score. Just like in the military, a company can earn a 5-star rank or a 1-star rank. Different companies with the same index rank can have different numerical scores. As the company's financial status changes over time, I adjust its rank and score. I look for trends that affect earning quality.

General Communication earns five stars
General Communication was founded in 1979 and offers communication services in Alaska. The company offers facilities-based local and long-distance voice services, cable television, data, and Internet access to residential and business customers across the state under the GCI brand. The company also provides wireless telephone services over its own facilities under the GCI and Alaska Wireless brand names.

As of Dec. 31, 2010, the company had approximately 97,500 long-distance customers, 144,800 local access lines in service, 147,100 basic cable subscribers, 138,700 wireless subscribers, and 116,900 cable modem subscribers. The company's five segments are Consumer, Network Access, Commercial, Managed Broadband, and Regulated Operations.

GNCMA competes with several communications companies in this space, including Alaska Communications Systems Group, AT&T, Cincinnati Bell, DIRECTV, Dish DBS Corporation, and SureWest Communications, among others.

Data from GNCMA's income statement (as of Sept. 30, 2011):

Metric	2008 (in Millions)	2009 (in Millions)	2010 (in Millions)	2011 LTM (in Millions)
Revenue	$575.4	$595.4	$651.3	$675.5
COGS	$203.1	$193.7	$207.8	$226.4
Gross Margin	$372.4	($402.1)	$443.4	$449.2
SG&A	$208.5	$212.7	$228.8	$233.4
Operating Income	$61.5	$66.1	$88.5	$88.9
Net Income	($3.4)	$3.5	$9.0	$4.5

Source: S&P Capital IQ.

The significant difference between operating income and net income, above, is due to sizable interest expense on long-term debt. GNCMA's balance sheet shows a business model that is subscription based (very low inventory levels) and has no surprises other than that receivables are rising slightly and long-term debt is high in relation to total assets. Like the Alaskan forest, retained earnings continues to grow nicely:

Metric	2008 (in Millions)	2009 (in Millions)	2010 (in Millions)	2011 (in Millions)
Accounts Receivable	$107.3	$138.2	$121.5	$162.6
Total Debt	$817.2	$872.3	$872.9	$942.3
Total Assets	$1,335.3	$1,418.4	$1,351.8	$1,451.4
Retained Earnings	$80.2	$84.7	$93.6	$100.3

Source: S&P Capital IQ.

The cash flow statement shows that GNCMA is managing its cash well through issuance and the retirement of debt to continue investing for growth (capital expenditures).

Metric	2008 (in Millions)	2009 (in Millions)	2010 (in Millions)	2011 (in Millions)
Cash From Operations	$175.3	$100.9	$171.3	$155.6
Capital Expenditures	$221.5	$121.0	$96.2	$154.3
Free Cash Flow	($73.1)	($1.8)	$73.5	$9.7

Source: S&P Capital IQ.

General Communication is poised for continued growth
There is an old riddle, "If a tree falls in the forest and there is no one there to hear its fall, did the tree make a sound?" The riddle is really about communication, for to have communication it must be two-way (as in sender-receiver). As for GNCMA, "We can hear you now!" The table below reflects per-share earnings that have been growing and will undoubtedly continue. Remember that revenue, accounts receivable, and operating income continue to grow at a healthy clip.

GNCMA Per Share Data	2008	2009	2010	2011
EPS	($0.036)	$0.066	$0.168	$0.166 (est.)
Book Value per Share	$4.90	$4.86	$4.25	$3.94

I don't need to be a lone voice in the wilderness on this one. This company is a howling play on infrastructure growth in Alaska, as the availability of more cable and wireless supply and penetration into our largest state will allow more subscribers to be added. This is not a stock for income-oriented investors because GNCMA pays no dividend. But, well, neither did Microsoft for 20 years. If you're looking at price-to-earnings ratios, you'll discover that the company has a trailing P/E of 131.95, but a forward P/E of only 21.64. This is very much in line with anticipated growth rates.

Foolish bottom line
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